Live blog and video of the Federal Reserve decision and Janet Yellen press conference

March 18, 2015, 1:15 PM ET

Reuters

Janet Yellen

Follow along as MarketWatch covers the Federal Reserve decision, the dot plot and ensuing press conference with Janet Yellen. Rex Nutting and Bill Watts will live-blog the proceedings, with video from the press conference and tweets from prominent Fed watchers.

The Fed is inching closer to the first increase in interest rates in six years, but it prefers to err on the side of caution. Call it cautious optimism.

The optimism comes from the rapid decline in the unemployment rate and the improvement in the labor market. The outlook for consumers is bright, with real incomes growing rapidly.

The caution comes from much weaker-than-expected growth in the first three months of the year.Maybe it’s just the transitory effects of bad weather, the stronger dollar, and the collapse in investment in the oil patch.

Before it raises rates, the Fed wants to be certain that the improvement in the unemployment rate will continue, and that the inflation rate will head back toward the 2% goal.

The big takeaway for the markets from this meeting is that the Fed will need more time to be sure.

That means the first rate hike won’t come until September, most likely. It could be later.

On a longer view, the big headline is that the Fed now believes that it can let the unemployment rate drop to 5% without pumping up inflationary pressures.

That means the Fed will be able to keep interest rates lower for longer.

The markets really really liked that. And so should anyone who’s still on the outskirts of the economy, waiting for a chance to participate.

Janet Yellen declined Wednesday to update reporters on her views on stock-market valuations. (Last July she said biotech and social media sectors, in particular, appeared stretched.).

The tech-heavy Nasdaq didn’t need an endorsement to again break the 5,000 threshold, hitting an intraday high above 5,001 as equities extended across-the-board gains. The Nasdaq broke 5,000 earlier this year for the first time since 2000.

As for Yellen, she said she didn’t want to comment on particular sectors, but that, as the Fed had noted, overall equity valuations “appear on the high side but not outside of historical ranges.”

The Fed is sounding a lot less hawkish than many traders had anticipated and that’s translated into a significant pullback for the dollar. The euro traded as high as $1.0801, according to FactSet, its strongest level in a week.

The dollar’s reaction is important to other markets since the torrid pace of the currency’s rise has at time unsettled stock investors while also exerting additional pressure on commodity markets.

A desire to avoid a Treasury selloff–and a spike in yields–likely prompted the Fed to replace its “patient” pledge with an explicit warning that rates aren’t likely to rise in April and to signal that a June rise also isn’t set in stone, said Paul Ashworth, chief U.S. economist at Capital Economics, in a note.

That said, there never was much danger of a Treasury rout, Ashworth said, given the downward revisions to the rate path contained in the dot plot.

Throw the Fed statement out the window, the stock-market rally is all about the so-called dot plot, says Andrew Wilkinson, chief market analyst at Interactive Brokers, in a note.

The 17 dots representing members’ predictions on where short-term rates should be at the end of this year have been lowered substantially. In the December report, views ranged between 1-2% with little by way of consensus. Only three members agreed on any given rate. Three months on, there is an emerging consensus with seven members predicting that rates will end 2015 between 0.5 and 0.75%.

All in all, a more dovish outlook on rates from policy makers was displayed across the forecast horizon, Wilkinson said. “The softer tone has caused the dollar to slide across the board, which coupled with reignitionof ‘lower for longer’ means a surge in equity prices,” he said.

An increase in the federal funds rate “could be warranted” any time after the April meeting, Yellen says.

The first increase could be in June, she says. But the forecasts in the dot plot indicate that most members of the Fed expect only two rate hikes this year, which implies the first hike would come in September or October.

“It will be appropriate to raise the target range for the federal funds rate when the committee has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term,” she says.

Job growth is strong, but there’s still lots of slack in the labor market.

Growth has slowed, but the Fed expects continued moderate growth ahead.

Inflation has fallen, mostly because of lower energy prices and a stronger dollar weighing on import prices. However, the Fed thinks inflation will move back to 2% gradually. Inflation expectations have remained stable.

Looking ahead, the Fed downgraded its GDP forecast, but also said the unemployment rate would be lower than it previously expected. Inflation won’t get back to 2% before 2017.

From the statement: ” Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate.”

The key question for the Fed now is when will it feel confident enough that inflation is returning to 2%? That’s when it’ll be able to raise rates.

If inflation pressures do begin to build, the Fed might not have the luxury of slowly raising rates, Deutsche Bank’s Torsten Slok warned earlier this week.

We know from history that inflation isn’t a “smooth linear process,” he notes. Once the economy hits full capacity, prices start to trend higher. It’s more like a “binary” process in that “when inflation starts moving it starts moving and it tends to overshoot its target,” he said.

Some wage measures are already displaying this property, but Slok emphasizes this doesn’t mean core inflation is about to trend higher.

In the meantime, however, rates investors are stuck in a “difficult game theory problem,” Slok said, and it goes like this:

“If I short rates today it is expensive and I will therefore underperform my benchmark. If I continue to bet on low inflation and hence low rates then I will earn the yield/carry. So why don’t I just continue to bet on low inflation and once we see signs of an uptrend in inflation then I will run for the exit,” he writes, adding ominously: “Together with everyone else.”

According to the latest “nowcast” from the Atlanta Fed, first-quarter gross domestic product could come in at just 0.3%. A lot of headwinds hit the economy at once: Bad weather, a stronger dollar, a sharp drop in investment in oil and gas drilling and a port strike.

The Fed thinks that slump is temporary, but policy makers did downgrade their 2015 GDP estimate from 2.6% to 3% to 2.3% to 2.7% and lowered their 2016 forecast by a similar amount.

Treasurys rallied in the wake of the statement, pulling down yields as fears of a summer rate hike ease.

The yield on the 2-year Treasury note is down around 7 basis points on the day at 0.605%, falling from around 0.6698% ahead of the Fed announcement. The 10-year yield just dipped below 2% to 1.9992%, down from 2.035% ahead of the annuncement and off more than 5 basis points on the day.

For immediate release

Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Fed sharply lowers median ‘dot’for 2015 to 0.625% from 1.125%

We’re just minutes away from the Fed’s statement at 2 p.m. The press conference will begin at 2:30 p.m.

Everyone will be skimming the Fed announcement and listening carefully to Janet Yellen’s press conference for hints about when the Fed will begin raising interest rates. Most participants in the market expect the first rate hike in June or September.

Most likely, the Fed statement will keep the door open for a June or September rate hike, but a lot will depend on how the economy evolves between now and then. Unemployment, inflation, the pace of economic growth, the dollar’s value, and market volatility will all feed into the decision.

A return to more volatile trading and wider ranges is a feature that investors best get used to as the Fed moves to “normalize” monetary policy, said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, in a note.

The S&P 500 has traded in a daily range of 20 to 30 points in the runup to the current Fed meeting , while the Dow has seen ranges of 150 to 250 points. Tension is likely to increase in the runup to each Federal Open Market Committee meeting over the next couple of years–”yes, years,” Wren writes. “The FOMC meets eight times each year, so this issue of building tension in anticipation of the next monetary policy meeting every month or two is going to get old pretty quickly,” Wren wrote.

So that means the next Fed meeting will likely garner the same attention from investors and media as this week’s meeting, Wren says, admitting that he “can’t help but laugh when the financial media keeps telling us that each meeting is the ‘biggest Fed meeting in years’…again.”

There’s a lot of attention on what the Fed or, more likely, Janet Yellen has to say, if anything, about the strength of the dollar, which has been on a tear since last summer.

That’s helped temper the dollar rally in the immediate runup to the Fed statement. The ICE dollar index is off 0.3% today at 99.268, while the euro is up 0.4% at $1.0644 after setting a 12-year low earlier this week.

Starbucks just announced a 2-for-1 stock split. Yellen frequently gets a question about the frothiness (get it?) of the stock market. Yellen usually shies away, as the one time the Fed made a mention about the valuation of social media and biotech stocks, the market went nuts.

Eric Scott Hunsader of Nanex tweets that Treasury liquidity just dropped to a new low since 2014 for this time of day before the FOMC decision. (The tweet itself has a colorful if confusing chart — click here if you’re interested.)

The big drop in the unemployment rate comes when measures of inflation aren’t showing much movement. Here’s the one the Fed officially targets, the PCE price index. Look how far away it is from the Fed’s 2% target, but Fed Chairwoman Janet Yellen says that’s mostly a temporary reaction to the rapid drop in crude oil.

There’s a lot more at stake than when (or if) the Fed will start to hike rates. How high is another big question, and the dot plot — the interest rate projections of all of its members — will give an indication as to what the Federal Open Market Committee is thinking.